Guest Commentary: A Different Holiday Trading Environment - Courtesy of the Fiscal Cliff

by
Yohay Elam, Technical Strategist

If you have a vacation planned for the holiday season, that's great. But if you don't have anything special, this year's forex market could be more exciting than usual.

The clock is ticking and the US is riding towards the fiscal cliff. Will the US go over the cliff? This is still an open question. Yet it becomes clearer that this issue will not be over before the holiday season. US lawmakers already cancelled their vacations until the "cliff” is resolved.

Holiday seasons are not always that quiet: China has already used the holiday season to slip in interesting economic announcements. Israel has launched operation "Cast Lead" in Gaza over the Christmas weekend of 2008. This time, the fiscal cliff issue is not a surprise, but headlines could certainly move the markets.

Most of the big market participants go on vacation during this season, and liquidity drops. Normally, also market action grinds to a halt - no volatility. With higher uncertainty, any headline can trigger action by the very few traders left out there.

So this time, the combination of big news from the world's No. 1 economy and low liquidity could cause a lot of volatility.

While it provides opportunities for the few traders that aren't on vacation, it is important to remember that when liquidity is low, currency pairs have a tendency of not respecting technical lines: your perfect system may prove less than perfect in these days. Remember to adapt yourself to higher volatility and lower your leverage.

Despite the low liquidity, there are two currencies that might behave more normally:

EUR/USD: Since this is by far the most popular pair, liquidity could still be more normal than in many other pairs. It doesn't mean normal behavior, but not as wild as most other currencies.

USD/JPY: This is also a popular pair, and more importantly, there is no holiday on Christmas Day, December 25th (although there is a bank holiday on the 24th). Japanese market participants tend to trade their own currency in larger proportions than other regions, so the yen might enjoy higher liquidity.

Are you planning on trading during the holidays? Are you trading the fiscal cliff? If so, how?